The IMF, OECD and World Bank issued a statement Friday calling for increased government action to restore market confidence and break the banking crisis.

The experts from the three organizations met in Paris last week to consider the financial crisis as part of an ongoing initiative to enhance inter-institutional co-ordination on pressing economic policy issues. Their discussions centred on the policy challenges posed by the deepening global financial turmoil and economic recession.

On Friday, the groups issued a statement saying, “There is an urgent need to restore market confidence in the financial sector and stimulate the real economy; efforts on these two fronts must be pursued simultaneously and in a mutually reinforcing way in order to increase their impact on the real economy.”

The groups noted that restoring banks’ capacity to lend is essential to put economies back on the path to growth. “Efforts to remove or isolate toxic assets must be stepped up in order to enable a sustainable recapitalization of banks and a timely end to the credit crunch. Regulation, supervision and tax policy also need to be reviewed, and upgraded where necessary, to avoid a return to the unhealthy incentives and excessive leveraging that precipitated the crisis,” they added.

There also continues to be an urgent need for fiscal stimulus, they stressed. “The deepening of the downturn suggests the need for an increase in high-impact fiscal expenditures in the first half of 2009, with further support in the following quarters, by countries in a position to prudently undertake such spending,” they said. “At the same time, embedding stimulus packages in a credible medium-term strategy that safeguards fiscal sustainability will also increase their impact in the short term. Due attention should be given to longer-term policy perspectives, including consideration of how stimulus policies could work to serve the objectives of climate-friendly and innovation-enhancing investment.”

“Stronger co-ordination among those countries taking financial and economic measures would maximise impact, increase the effectiveness of demand-boosting measures, and avoid beggar-thy-neighbour effects. Looking ahead, broadening the coverage of regulation and supervision to the non-banking sector will also be necessary to avoid a recurrence of the regulatory competition – and resulting lowest common denominator regulation – which played an important part in the crisis,” they noted.

The groups also stressed the need for continued vigilance by governments against trade and investment protectionism. “There has been a disturbing drop in trade volumes, exacerbated by the rising cost of trade finance. Furthermore, a drop in capital flows would signal a significant disruption in the traditional reliance of emerging and developing economies on foreign direct investment,” they said.

In addition they addressed the issue of rising unemployment, stressing the need to support human capital formation and to avoid policies that would undermine recent reforms or reduce the labour supply.

Finally, they called on international groups and multilateral institutions to focus on improving the collective impact of policy responses, restoring confidence and paving the way for a post-crisis regulatory architecture characterised by enhanced co-ordination.

IE